Question

MAC = 90 – E and Marginal Damages is MD = 30 + 2E, where E is measured in tonnes. 19) Suppose the Chemical Company owns the river. Begin by assuming there has not been any agreement. The Fishery offers the Chemical Company $50 per tonne of abatement, and the Chemical Company agrees. What will be resulting Net Social Benefit (NSB) of the agreement?

Answer 1

Consider the given problem here the “MAC” is given by, “MAC = 90 – E”. So, without any restriction the company will emit unit “MAC” will be zero. So, by “MAC = 0”, => E=90”.

Now, if the fishery offer “$50” per tons of abatement, => the optimum level of “E” will be determined by, “MAC = 50”, => 90 – E = 50, => E = 40, => the company will reduce the emission by “50” tons. Consider the following fig.

So, here “E1” be the level of emission without any restriction and “E2” be the level of emission when the company will be paid “$50” per unit reduction of emission. Now, if the company reduce the level of emission form “E1” to “E2”, => the total cost of the fishery reduced by “AE1E2F” given in the above fig.

Now, on the other hand the companies abatement cost also increases by “E1DE2” and the fishery are also paying the amount which is given by “E1TDE2”.

=> the net social benefit is given by the area, AE1E2D – E1E2DT – E1E2D.

=> ATDF + E1E2DT – E1E2DT – E1E2D, => ATDF – E1E2D, => ABF + BTDF – E1E2D.

=> ABF + BTDF – E1E2D = 0.5*(210-110)*(90-40) + (110-50)*(90-40) – 0.5*50*(90-40).

=> 0.5*100*50 + 60*50 – 0.5*50*50 = 2,500 + 3,000 – 1,250 = 4250.

=> the net social benefit is “4250”.